Subject- Value Added Course

Subject code- Blockchain

Assignment: Smart Contract and Legal Framework

Submitted by: Submitted to:

Gurisht Mittal
22BBL70222
BBA.LLB Sec B
 Smart Contract and Legal Framework
The recent decade has witnessed the rapid growth and advancement of technology. Though the concept of
drafting a smart contract by blockchain technology was first proposed in the 1990s by Nick Szabo it's the
last decade in which the rise of the smart contract can be seen to such a great extent. Ethereum one of the
leading smart contract service providers deployed almost two million smart contracts by the year 2020.

India is not untouched by the pinnacle of smart contracts many Indian corporate giants such as Bajaj,
Mahindra, Hindustan Unilever, and banks like YES Bank, HDFC Bank are already using smart contracts
brilliantly for payments and other uses.

In recent years many start-ups like Signzy, InstaDapp, Matic Network, and established companies like IBM,
Tech Mahindra, TCS, Accenture jumped in the race of smart contract and providing smart contract services
to their clients.

The smart contract has many applications starting from real estate to medicine it has no limitation but India
has a long road ahead technically and legally to overcome the obstacle in the journey. In the presented article
author put focus on the legal issues faces by the smart contracts in India and the mechanism available for
dispute resolution.

Smart Contract
The term “smart” in this context, therefore, really refers to the characteristic of being
automatable – i.e., the ability of software to perform certain tasks through automated processes
(this is discussed further at section 1.2). In this paper, the term “contract” denotes an agreement
constituted by a set of legally enforceable rights and obligations between the parties.4 The
enforceable nature of smart contracts is considered further at section 1.3. The ways in which
smart contracts may be formed (as opposed to what they are) are also the subject of further
discussion in this paper
A smart contract is a type of computer programming that is made on a blockchain technology-based platform
such as Ethereum, IBM, Etc. A smart contract can also be called a digital contract which is different from
the traditional contract because it has minimum human interference. The term of the contract is written in
codes on the blockchain platform and once these terms are met by the parties' code verifies it and executes
the contract and fulfills the conditions of the contract upon which the parties agreed.

Blockchain Technology
Blockchain is an improved version of DLT (Distributed Ledger Technology) somehow these two terms are
used interchangeably but both work on a different principle of technology Blockchain uses a linear connected
chain of blocks whereas DLT is a decentralized ledger that is not linear. Blockchain decentralizes the process
and its work on peer-to-peer networks hence eliminating the middle man and helping maintain data that can't
be tampered with and its sequentially arranged by the time stamp in the nodes of blockchain and hence
doesn't need verification of payment by the third party and highly secured.
Legal drawbacks of smart contract:
India currently doesn't possess a dedicated legal framework to govern the blockchain or smart contract
however there are certain prevailing laws in India such as Contract Act, IT Act, and Evidence Act, by which
Smart Contracts can be made enforceable in India.

The Indian Contract Act, 1872:

Legitimate Offer, Proper Acceptance, Free Consent, Lawful Consideration, and Lawful Objective are the
requirement which is mentioned in "The Indian Contract Act 1870" to make a legally enforceable contract.
If a smart contract fulfills these conditions then it can be enforceable in India.

But there are other aspects also which should be taken into consideration like:
• Parties get into a smart contract by using the services of the third party platform but the parties
entering into contract neither ever met each other nor they knew each other's real identity and one
of the parties decided to back off from the contract or not to fulfill their end of the deal there is the
possibility that the platform which is providing such facility of the smart contract have their
mechanism to resolve this kind of dispute but what if they fail to resolve it because they have neither
the power nor the authority by which they can force the other party to meet their end of the contract
in that case courts will be the last resort but at present, there is no law regarding the smart contract
court might take a lot of time to resolve this issue or there is a possibility that the court won't even
consider such contract as a valid contract because parties were not even aware of their real identities
and lastly the doctrine of caveat emptor can also come into play.

• Parties familiar with each other came into a smart contract but as mentioned above smart contracts
are the line of codes that can't be changed once executed what if parties with mutual consent want
to change the terms of the contract or if one party is unable to fulfill the condition currently but
promise to fulfill if time is given and the other party agreed to that but the code is already written it
can't be changed so other party has to pay the compensation for the non-fulfillment of the condition
of the contract. Force Majeure provision should also be taken into the consideration.

• Smart contracts are the computer programming that is designed by humans so there is a possibility
of human errors in these contracts and also bugs in computer programming are not something new.
So now the question arises who is going be responsible for such errors and how they are going to
compensate. Whether the parties and the service provider together bear the monetization loss or the
service provider alone going to compensate. Bugs as mentioned above are the biggest concern of
the coders how they are going to tackle this problem is unclear.

• Parties can enter into the smart contract from any part of the world so which court will have the
jurisdiction in case of the breach of contract. This point needs careful consideration.
However, there is no provision for the validity or the enforceability of the smart contract in The
Indian Contract Act, 1870. So, unless the judiciary gives a verdict in case of a smart contract or the
government pass an act or issue some guidelines regarding the same position on a smart contract
will remain unclear.

Types of smart contracts

There are five types of Smart Contracts, they are as follows:
 • Shrinkwrap agreements
Shrink Wrap Contracts are typically licensing agreements for software [Agreements packaged
with products]. In general, the term Shrink Wrap Agreements refers to boilerplate or license
agreements, as well as the terms and conditions that come with the products. The consumer’s
acceptance of the contract in this sort of contract is determined by his or her use of the product.

• Clickwrap agreements
The term Click Wrap Agreements means giving consent for any purpose or for not giving
consent for any purpose by clicking the button. [i.e., “Accept” or “Reject”]

• Browse wrap agreements

The term Browse Wrap Agreements means to use materials available on a website or to have
access to the downloadable product. The individual can only access the contents of the web
page if he agrees to the terms and conditions on the web page.

• E-mails
Emails can also be electronically signed, which is a crucial factor in determining whether an
agreement becomes a contract. Smart Contracts which are executed through e-mails have been
ruled in several cases, to constitute a legally binding contract.

• Digitally executed agreements

Electronic signatures are the digital and verified equivalents of traditional wet signatures.
Electronic signatures are used to sign documents online in one of two methods –

• Aadhaar-based digital signatures with an OTP

• Digital signatures that use an asymmetric public key system and hash methodologies
and allow users to sign documents with a password.

Features of smart contracts

• Distributed and transparent
Smart contracts are maintained on a blockchain, they operate on a peer-to-peer network, which
means they are dispersed among all nodes running the blockchain and anybody can read the
contract’s information.

• Customizable
Before implementation, smart contracts can be programmed in a variety of ways to meet the
demands of the transacting parties.

• Deterministic
No matter who executes smart contracts, the outcome is always the same depending on the
actions they are designed to perform.
Benefits of smart contracts
• Automation
Smart Contracts can help to automate a lot of processes.

• Efficient
Since the contracts are saved on computers, they carry out the functions as soon as the
prerequisites are met.

• Security and storage

The contracts are recorded digitally on a blockchain, they are protected by encryption, and the
possibility of losing or misplacing them is eliminated.

• Immutable
Contracts that have been deployed cannot be modified, thereby removing the possibility of
manipulation by other parties or any of the parties participating in the agreement.

• Cheaper
Intermediaries typically charge a fee to facilitate transactions between two parties, which will
be significantly reduced, if not eliminated, with smart contracts.

Limitations of smart contracts

• Inability to adjust
Smart contracts are immutable, any errors or flaws in the contract cannot be fixed after they are
stored on the blockchain. Contracts can be cancelled if a ‘SELF-DESTRUCT’ function is
introduced while they are being created.

• Software bugs
Since all the data is stored in computer codes, it may be prone to software faults.

• Third-party
Smart contracts cannot completely replace third parties as some processes do require human
intelligence that cannot be replaced.

• Vague terms
Since contracts include terms that are not always understood, smart contracts are not always
able to handle terms and conditions that are vague.

Validity & enforceability of smart contracts

As per Section 10 of the Indian Contract Act, 1872, the following criteria must be satisfied for a
legitimate contract:
 1. The parties to the contract must be competent to contract.
2. The Contract must be based on the free consent of the parties.
3. The Consideration and Object must be lawful, and
4. The Agreement must not be expressly declared to be void
The Indian Contract Act,1872 shows no evidence of the following requirements:

• A written contract unless there is a legal requirement to have a contract in writing;

• A signature either physically or electronically.
Thus, Smart Contracts are enforceable in India as long as they meet the aforementioned criteria.

Section 5 and 10 of the Indian Information Technology Act, 2000 legally recognize digital signatures
and acknowledge a contract as authentic and enforceable through electronic methods. Furthermore,
Section 65B of the Indian Evidence Act, 1872 stipulates that a contract that has been digitally signed is
admissible in a court of law. As a result, the government can take legal action to resolve the issue
between the parties.

Smart Contracts, in essence, give a framework for negotiating with parties who may or may not know
each other and who may or may not be liable for the risk. Smart contracts may be enforceable under
Indian law, but if caution is not exercised about the party with whom you are dealing, the repercussions
of failed transactions must be carried alone, as the legal system lacks a detailed framework in place to
control smart contracts.

Smart contracts may not be enforceable under Indian law if the consideration for the contract is not
mutual. This can happen if the contract is unilateral. Contracts are not valid in Indian courts without
mutual consideration; however, smart contracts without mutual consideration can still be enforced
through code; however, a breach of such a contract would not be considered a breach in Indian courts
because, in the eyes of the court, there would not have been a contract in the first place due to the lack
of mutual consideration, an important factor of contract.

The legality of smart contracts in India permits the use of smart contracts; however, it does not provide
the parties involved in the smart contract with legal protection if they become liable or incur damages
because there is no supervisory framework in place to govern the smart contracts; however, the law will
assist to the best of its ability if the smart contracts fall within the limits of contract law as defined in
the statute.

Conclusion
There is no doubt that the application and expansion of smart contracts is the next stage in innovation
and can directly lead to billions of dollars in overhead expenses being reduced while making the entire
system more efficient.

However, regulatory concerns arise, particularly in India, where there are no regulations governing the
finer aspects of smart contracts. If particular laws are not enacted, widespread usage of the technology
will necessitate modifications to the Indian Evidence Act of 1872 and the Information Technology Act
of 2000.
As a result, while there has been some progress in legislation and business sector adoption of the smart
contract concept, the law is still operating in a murky area, and a strong commitment is necessary to
develop an intricate structure to regulate the operation of smart contracts in India.